In the spring market of 2022 demand for rentals is at it’s highest point in years.  High demand is driving up the price of rents and causing fierce competition for suitable, available properties.  The same forces that are impacting the home purchase market are trickling down to the rental market.

With two years of the pandemic and lock downs, potential home sellers have sat on the sidelines.  Due to the fallout from the economic collapse of 2008/2009 and the Covid shutdowns, new home builds have been well below historic norms for years.

The shortfall of existing homes on the market, and a lack of new homes, has push inventory to historic lows.  Recently tenants have been more likely to stay in place than at any time in history.  Due to temporary changes in evictions rules, and Covid money for landlords and tenants, turnover is at an all-time low.  Interestingly enough, the current difficulties in the rental market is causing more interest in a home purchase.

Job history – what do lenders look at?

If you are employed, and paid on a W2, lenders wants to see a two year work history.  Your work history over the last two years should be in a similar line of work.  The great news is that if you have recently graduated college and are now working in a field related to your degree underwriting will consider your years in school as part of your work history.

As long as your job can be tied to your degree and have an offer letter with a start date and verifiable income – you can qualify.  Every mortgage has slightly different guidelines.  If you meet these conditions you have a green light to check with your mortgage broker and get your pre-approval process started.

What income is used to qualify?

If you are employed and paid on a W2, but have worked less than two years the lender will generally qualify you on base salary or hourly rate.  If you will be starting a new job within 60 days of a home purchase, the lender can use an offer letter.  They will take the base salary of hourly rate listed on the letter and verify it with your future employer.

If you have a base salary or hourly rate. but also receive variable income, you will need a two year history of the variable income.  Variable income includes pay such as bonus, commission, and overtime.  Remember your base salary will determine the qualified purchase price.

My credit is great and I have the needed assets but my income is a little short.  What are my options?

When considering mortgage approval, lenders primarily consider Credit, Assets, and Income.  Different loan programs allow for different qualifying debt ratios.  An FHA mortgage will allow for a higher debt ratio (and a lower credit score) than a conventional loan.  Once a pre-approval is completed, your mortgage broker will be able to review options.

In a scenario where your debt ratio is too high for a conventional or FHA loan – a potential option is a Non-Occupant Co-Borrower.

What is a Non-Occupant Co-Borrower?

A non-occupant co-borrower is a family member or friend whos is willing to co-sign the mortgage.  The non-occupant does not live in the home but will be on the mortgage and title.  A non-occupant co-borrower should have good credit and verifiable income.  With a non-occupant co-borrower, the lender allows for significantly higher debt ratios.

Is the Non-Occupant Co-Borrower taking a risk?

The non-occupant is a co-signer on a loan.  They have ownership in the property and are listed on the mortgage.  The mortgage payment will appear on their credit report.  A non-occupant, should realize, that they also are responsible for the payment.

If you are able to find a non-occupant co borrower that will sign for you – you are in a great situation.  A non-occupant co-borrower can go a long way in setting you up for your lifetime real estate journey.  Although, your initial mortgage will most likely be a 30 year term, we always let the co-borrower know that they do not have to be responsible for the mortgage for 30 years!

Often a non-occupant can be a short term situation.  Most first-time home buyers are just starting their careers.  As a first time home buyer you can often expect your income to increase over the years.  Your mortgage can be refinanced potentially in 1-3 years.  If you are able to qualify on your own income the co-borrower can be refinanced off the mortgage and removed from title.

Your first home may be temporary.  Due to changes in employment, desired living location or growing family you may only own your first home for a few years.  Once you sell the home and pay off the mortgage, the non-occupant co-borrower is no longer responsible for mortgage payment.

First home to rental home

Within a few years you may decide that it is term to purchase a new home.   You might also decide that you are ready to take a step to become a landlord.  Now, with your income and expected rental income, you could potentially refinance to remove the non-occupant co-borrower.  Or potentially, you co-borrower would like to partner up with you on the rental property.  In which case, they would remain on the mortgage and title.